Magazine

Putin May Be Clearing A Path Toward Change

March 07, 2004

Was it a reflection of his autocratic streak? Or a sign that Russian President Vladimir V. Putin wants to get a head start on reforms planned for his second term, after his widely anticipated landslide reelection victory on Mar. 14? That's the chatter among Moscow's political set after Putin dismissed his entire government on Feb. 24, more than two weeks before the Presidential vote.

The inscrutable Putin's motives are always hard to read. But there's no doubt that the dismissal sweeps away the last political vestige of the Yeltsin era, Prime Minister Mikhail B. Kasyanov, who was linked to controversial business oligarchs such as jailed Yukos Chairman Mikhail Khodorkovsky. That opens the way for Putin to put his stamp on his next administration unencumbered by holdovers from the past -- and to ask voters for a clear mandate.

Vanishing Tycoons

Moscow is astir with speculation over whom Putin will nominate as prime minister in the days before the vote. While some Russians fear he will favor the siloviki -- officials from the military and security services whose importance rose in his first term -- more are betting that Putin will tap an economic reformer as prime minister. Insiders say Alexei Kudrin, the outgoing finance minister and Putin's friend from St. Petersburg days, could be the President's choice.

That would reassure business but not erase all of its concerns. Some big companies fear that Putin could open more investigations into past business dealings -- like the probe that led to Khodorkovsky's October arrest on tax-evasion charges. "Of course, business is afraid," says Evgeniy Yuriev, president of investment bank Aton LLC and chairman of lobby group Business Russia.

But the country's tycoons have been going out of their way to ensure that they don't cross Putin. Unlike the ambitious Khodorkovsky, they are staying far from politics. As long as they continue to do so, Yuriev and other observers predict that the President won't go after more oligarchs and will instead opt for a reform blitz after the election. Putin wants to slash bureaucracy, cut the red tape that entangles small businesses, toughen financial regulations to boost trust in the banks, develop a mortgage market, and slowly start to repair battered health and education systems. To boost living standards further, Putin needs more economic growth -- even beyond last year's 7.3%. Despite six years of expansion, some 25% of Russians live in poverty. And the economy is too resource-dependent: The World Bank says oil and gas production account for one-quarter of gross domestic product.

Many Russian and Western investors are optimistic about Putin's chances for accelerating economic reform. He enjoys 80% popularity, and his proposals will probably sail through the Duma, which is controlled by the pro-Putin United Russia party. "We're expecting some significant improvements in the investment climate," says Igor Jurgens, vice-president of the Russian Union of Industrialists and Entrepreneurs.

A bigger problem will be preparing Russia for the transition after Putin's second term. Russia's current stability is too centered on his persona. If Putin wants to build a European capitalist democracy, as he claims, he needs to strengthen Russia's civil institutions, from its political parties to its media. That may be the Russian President's real challenge over the next four years -- whether he realizes it yet or not. By Jason Bush in Moscow